Private equity refers to privately negotiated investments that are typically made in non-public companies. Private equity investments can be made in a range of stages of a business’s life, financing everything from start-ups to well-established firms.
Private equity can be an attractive asset class for a broad range of investors as it can boost the performance of their investment portfolios and provide access to fast-growing companies in sectors that are harder to reach through public markets. However, the spread of performance in private equity is much wider than in other asset classes. Therefore selecting and accessing the best private equity managers with real expertise and a proven strategy is key to achieving success.
Private equity funds are managed by private equity firms or “private equity managers”. Private equity managers acquire influential or controlling stakes in high quality portfolio companies that are typically privately owned. They believe that these companies:
- Can be improved significantly through hands-on active management.
- Offer the potential for substantial value creation over the long term.
- Can offer faster growth than public companies as they are typically orientated towards high growth sectors, and are able to innovate and respond to customer needs rapidly.
- Can be sold for a higher amount than their original investment.
We believe that the best private equity managers:
- Are often industry sector experts and use their knowledge and resources to create value in their portfolio companies.
- Operate according to a long-term investment horizon.
- Offer hands-on management support to implement strategic and/or operational change to enhance a company’s value.
- Invest alongside company management to ensure alignment of interests.
- Take environmental, social and governance factors into account when making an investment.
- Are able to manage assets through economic cycles.
- Use debt sensibly.
- Are capable of generating returns that can outperform the public markets.
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Ways of investing in private equity
PIP invests in private equity via three different types of investment. Each type has its own unique characteristics:
Investing in a private equity fund when it is first raised – this is done on a “blind pool” basis.i
Acquiring an existing interest from a seller in a private equity fund that is already substantially invested. PIP also invests in a company directly, via a single-asset secondary, alongside a private equity manager, that the manager has already owned for a period of time and therefore knows well.
Investing directly into a company alongside a private equity manager.
Making attractive returns in private equity
Once agreed growth targets have been met, and usually after several years, the private equity manager may decide to sell their interest in their portfolio company. Private equity managers focus on potential exit strategies when identifying target companies, and during due diligence. They are able to position their investments for sale and can time their realisations, exploring each major potential exit route.
Value is crystallised at the same time for the private equity manager, their investors and company management when the companies are sold at a profit, which can be in three main ways:
- To corporate/strategic buyers;
- Through a secondary sale to another private equity manager that will take the company into its next stage of growth;
- Via an Initial Public Offering.
Barriers to entry are high in private equity
Access to private equity funds, and the exciting opportunities that they offer, is typically restricted to a select group of investors
The reasons for this are:
- Investors in private equity funds are often expected to lock up their capital for at least ten years.
- Many private equity firms only accept high minimum commitments to their funds from selected investors.
- Many investors do not have the resources to handle the complex administration required for such investments.
- Many investors are not able to invest directly into private equity due to regulatory constraints.
- Many investors do not have the requisite knowledge of private equity, or the right relationship with the private equity managers. In this asset class, the managers can select their investors.
Buying shares in a listed private equity company, such as PIP, allows investors to gain ready access to private equity opportunities and overcome the issues listed above. Investors can also benefit from the administrative simplicity and liquidity obtained from being able to buy and sell shares trading on a recognised stock exchange. In addition, capital gains with an investment trust structure are retained within the vehicle and not taxed. i
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Insights & Research
Hear from the Pantheon team and some of our private equity managers talking about market dynamics and value creation in private equityFind out more